Select Committee on Transport, Local Government and the Regions Eleventh Report



II. Operational and financial consequences of 11 September

9.   Immediately after the 11 September attacks, the United Kingdom's air transport industry faced reduced revenues as a result of airspace closures and restrictions and longer-term declines in traffic.[22] Economic optimism declined following the attacks, exacerbating the pre-existing decline in the lucrative premium and the trans-Atlantic market.[23] The industry also faced increased costs for insurance and security, which we consider below. Sir Roy McNulty, Chairman of the Civil Aviation Authority described the situation as the "transition from a cold to having pneumonia".[24]

Security

10.   Following the attacks, security increased in the air and on the ground.[25] In the United Kingdom, security was already higher than elsewhere in the world, and the industry was already compliant with the European Union's new Regulations and Common Rules on Aviation Safety.[26] Nevertheless, the industry has had to bear the substantial cost of additional security. The airlines themselves could not be precise about the cost of extra security. The Charter Group estimated a figure in the order of £5 per passenger.[27] The British Air Transport Association (BATA) estimated the cost of higher security could be £100 million a year for United Kingdom airlines.[28] Airports, which may incur additional capital and policing costs, expected to incur additional costs of 5 to 10 per cent for security, which, when passed on to airlines, would equate to ten pence per departing passenger.[29] Service providers such as catering companies and ground handling organisations have also incurred additional security costs.[30]

11.   The Government does not intend to provide financial assistance for the additional security costs to airlines.[31] The British Air Transport Association asserted that the United Kingdom industry was at a disadvantage because in other European states security was subsidised by Governments.[32] The Airport Operators Association added that the "recent additional costs that we have experienced in the United Kingdom's airport system are obviously adding to those inequities".[33] The industry therefore favours the Government taking a greater role in providing and financing security.[34] We do not support long-term public assistance for the additional security costs incurred by the air transport industry as a result of 11 September.

Insurance

12.   Within days of the attacks on the United States, airlines and airports were informed by their insurers that war, terrorism and third party cover would be withdrawn. That would invalidate leasing agreements and other obligations, which would result in the cessation of air travel in the United Kingdom.[35] The insurance industry did not consult the Government or the industry prior to the withdrawal of insurance.[36] The Government rapidly set in place measures to provide the necessary insurance cover, initially for thirty days, and subsequently extended that cover.[37] The Government's intervention in the insurance market has been welcomed, although the Charter Group pointed out that the insurance scheme is calculated on a per passenger basis, which it considered inequitable as charter airlines fly at higher load factors than scheduled airlines.[38]

13.   The industry has also faced increases in other insurance costs.[39] The Government considers the significant increase in the cost of insurance for the air transport industry to be primarily a commercial matter and that the cost of increased premia should be passed on to users in the normal way. Sir Roy McNulty accepted that the insurance industry had left "a big gap ... which has been filled by the Government".[40] Mr Jamieson was hopeful that there would be a return to the commercial insurance market shortly.[41]

14.   We condemn the hasty manner in which the insurance industry withdrew cover for aviation following the terrorist attacks and welcome the Government's prompt and appropriate action in implementing short-term measures to ensure continuity of essential insurance cover. The Department should provide a report on progress towards a return to a wholly commercial insurance market, and an indication of its view on long-term solutions to providing war risk and terrorism liability insurance cover for the air transport industry. We recommend that the Treasury publish figures on the amount of money it has received from the industry by way of premia and explain what it intends to do with the money.

Impact on the industry

15.   Scheduled airlines responded to the events of 11 September by seeking cost reductions through withdrawing flights and cutting staff numbers.[42] Many carriers withdrew aircraft from service. More than fifty aircraft have been grounded.[43] However, there has been a long-standing requirement for all ICAO signatory states to have their transport aircraft fleets comply with the new noise standards by April 2002. Many of the United Kingdom carriers' aircraft grounded following 11 September would have been required to be retired under the ICAO standards.[44]

16.   Figure 1 indicates how cargo traffic declined following 11 September 2001. The Association of European Airlines freight data shows a total annual reduction of 15.4 per cent for international routes, with North Atlantic traffic showing the greatest decline of 30 per cent.[45] Figure 1, however, indicates that air freight tonnage to and from the United Kingdom had been in decline as early as December 2000.

17.   Low-cost operators, including charter and no-frills carriers, fared better than scheduled airlines after 11 September. No-frills airlines such as easyJet suffered an immediate decline in traffic, but recovered more quickly.[46] The impact on charter carriers has been less clear. Although charter carriers did not suffer the immediate catastrophic drop in traffic, forward bookings declined, because holiday-makers book well in advance. Charter carriers remain concerned about bookings for the summer of 2002.[47]

18.   Figure 2 illustrates the downturn in traffic at airports.[48] The impact varied between airports, with those that are largely reliant on low-cost airlines and not exposed to the United States market being relatively insulated from the worst effects.[49] Outside south east England, the impact on airports has varied, with Manchester airport reporting, in September 2001, a decline of 15.2 percent in long-haul scheduled passenger numbers, a 10 per cent reduction for the domestic London traffic and a 3.6 per cent reduction for other domestic routes. Manchester Airport Group reported a "significant fall in consumer confidence" for inbound and outbound passengers.[50] Ground handling companies, which service airports, identified the cost of insurance as their primary concern.[51]

19.   The immediate impact on airlines of the 11 September attacks was severe, particularly for those providing premium services to the United States. But there is no compelling evidence to suggest that there will be a medium to long-term reduction in passenger confidence in aircraft safety and security. In the past, passengers have adjusted to the imposition of more stringent security regulations and are unlikely to find difficulty in doing so again. We do not anticipate that the latest security requirements will have an adverse impact on the market for air travel .

20.   There is no doubt that, even though passenger confidence is recovering, times are tough for the air transport industry. We do not consider it appropriate to increase either the regulatory burden or the costs to any sector of the air transport industry now. We recommend that the CAA seek to postpone the introduction of any proposed increases in charges at regulated airports that may result from its recent review.

Job losses

21.   There have been substantial numbers of job losses, possibly as many as 20,000, throughout the air transport industry, support industries and the industry's supply chain.[52] Scheduled airlines such as British Airways, Virgin and bmi British Midland all announced job losses and attributed them to the events of 11 September.[53] The Transport and General Workers Union referred to a total of about 11,000 jobs lost throughout the air transport industry, and more than 12,500 jobs lost in industries that are partly or wholly reliant on air transport.[54] The union considered all the job losses in ground handling, catering, refuelling, and support service companies to be a consequence of reduced airline services following 11 September.[55] In aerospace manufacture, 7,000 redundancies have been announced.[56] The Minister confirmed that the Government would take action if it perceived large numbers of highly skilled manufacturing jobs being lost. He observed that "sadly ... a lot of the people who have lost their jobs in these circumstances are often people with low skills".[57] The events of 11 September had implications throughout the air transport industry, including general aviation and ground service providers. We recommend that the Government bring forward firm proposals to guard against the permanent loss of highly skilled jobs and personnel in the industry.

Air Traffic Control

22. Air traffic control revenues were drastically affected by the reduced traffic (see Figure 3) and the use of smaller aircraft since 11 September, particularly on trans-Atlantic routes, which generate 44 per cent of National Air Traffic Services' income.[58] Since concluding this inquiry, the Transport Sub-Committee has taken further evidence on the finances of National Air Traffic Services and the additional funding provided by the Government. We shall report our conclusions in due course.

23.   Without prejudice to the findings of our separate inquiry into NATS finances, we find it remarkable that the Department had not prepared a contingency plan for NATS going into administration or receivership.[59]


22  Ev. pp 138-139; QQ 2, 9, 229. Back

23  Ev. pp 97-98, 164. Back

24  Q 229. Back

25  See HC Deb, 11 April 2002, col 508W and HC Deb, 15 April 2002, cols 738W-739W. Back

26  QQ 314, 51. Back

27  QQ 53, 49. Back

28  Q 52; Ev. p 120; see also Q 137. Back

29  QQ 158, 138, 148. Back

30  Q 161. Back

31  QQ 162-163. Back

32  Q 52; Ev. pp 121, 166-167; see also Q 137. Back

33  Q 137. Back

34  QQ 135, 137, 288, 303; Ev. pp 86-87, 166-167. Back

35  QQ 43, 324. Back

36  QQ 322, 42-44. Back

37  Treasury minute: HM Treasury Airline Insurance Scheme and Extensions, 28 November 2001; HC Deb, 29 January 2002, col 202W; Q 47. The Government backed Troika insurance scheme for UK airlines was extended from 22 January 2002 to 20 March 2002, and then to 31 March 2002. The scheme has been extended to the end of May 2002. The premium payable by the insured airlines for cover above US$50 million increased on 1 February from US$ 0.35 to US$ 0.40 per passenger per flight, Treasury Minute: Amendments to HM Treasury Airline Insurance Scheme, 5 February 2002. Back

38  QQ 41, 46; Ev. p 137. Back

39  Q 40; Ev. p 124. Back

40  Q 271. Back

41  Q 325; see also HC Deb, 29 January 2002, 202W. Back

42  QQ 6, 11. Back

43  Q 9; Ev. pp 121, 136-137, 139. Back

44  Aircraft were retired or hush kitted in order to meet ICAO Annex 16 Chapter 3 standards which had an April 2002 deadline. Back

45  Ev. p 50; Thirty per cent fall on North Atlantic routes is main cause for Europe's worst ever monthly air cargo volumes, 31 October 2001, European Logistics Management, p 7. Back

46  Q 34; Ev. pp 142-143. Back

47  Ev. pp 147, 165; Q 38. In September 2001, bookings for Winter 2001-02 were 32 per cent down and 34 per cent down for Summer 2002, in October bookings declined further to 33 per cent down for Winter 2001-02 and 56 per cent down for Summer 2002.  Back

48  Q 117. Back

49  QQ126, 129-130; Ev. p 55. For example traffic figures for November were Heathrow 13 per cent down, Gatwick 20 per cent down, Stanstead 7 per cent up, Leeds Bradford International 26 per cent down, Newcastle 17 per cent down, Birmingham 4.7 per cent down, Manchester 11 per cent down. In Scotland and the Republic of Ireland passenger numbers increased in November. At Gatwick airport passenger numbers for November were European scheduled down 8 per cent, European charter down 3 per cent, North Atlantic down 26 per cent, and other long haul down 13 per cent.  Back

50  Ev. p 100. Back

51  Ev. pp 134-135. Back

52  QQ 284, 294. The Transport and General Workers Union referred to job losses in catering firms: Lufthansa Skychef 193 jobs, Gate Gourmet 320 jobs, Alpha 65 jobs; ground handling: Aviance 270 jobs, Service Air 414 jobs, Ground Star 20 jobs. Back

53  Ev. pp 136-137; QQ 193-194, 285. Back

54  Q 284; Ev. p 106. The Transport and General Workers Union referred to 6,373 job losses in engineering, 3,000 in tourism, 1,750 in travel firms, 1,010 in airport support services, and 540 in the hotel industry. Back

55  Q 285. Back

56  Ev. p 48. For example, Airbus, the European aircraft manufacturer plans to cut the equivalent of 6,000 full-time jobs, including 1,200 to 1,500 in the United Kingdom. The company has had 101 orders cancelled since 11 September, 90 per cent of which could be attributed to 11 September, Airbus to cut 6,000 jobs as orders fall, The Daily Telegraph, 18 January 2001. Back

57  Q 376. Back

58  QQ 191, 201, 204, 206, 219, 265, 357-358. North Atlantic routes constitute 14-16 per cent of NATS' traffic, but provides 44 per cent of its income, Ev. pp 55, 88, 99. Back

59  HC Deb, 30 January 2002, col 327w. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 5 July 2002